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Tax Traps Arising From Non‐Resident and Mobile Workers

Anticipate and Avoid Unwarranted Withholding Tax Duties and Nexus Triggers

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, JUNE 2, 2011

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Mindy Harada Director Employment Tax Practice PricewaterhouseCoopers San Jose Calif Mindy Harada, Director, Employment Tax Practice, PricewaterhouseCoopers, San Jose, Calif. Chaim Kofinas, Senior Manager, WithumSmith+Brown, Red Bank, N.J. Hollis Hyans, Partner, Morrison & Foerster, New York

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T T A i i F N R id t Tax Traps Arising From Non‐Resident and Mobile Workers Seminar

June 2, 2011 Chaim Kofinas, WithumSmith+Brown

ckofinas@ withum.com

Holly Hyans, Morrison & Foerster

hhyans@ mofo.com

Mindy Harada, PricewaterhouseCoopers

mindy.harada@ us.pwc.com

Today’s Program

How Mobile Workers Can Trigger Tax Obligations [Holly Hyans] Slide 3 – Slide 24 Difficulties With Current State Laws, Regulations [Chaim Kofinas] Slide 25 – Slide 43 Administrative Challenges For Taxpayers [Mindy Harada] Slide 44 – Slide 52 Options To Consider In Addressing These Tax Issues [Holly Hyans, Chaim Kofinas and Mindy Harada] Slide 53 – Slide 57

HOW MOBILE WORKERS CAN

Holly Hyans, Morrison & Foerster

HOW MOBILE WORKERS CAN TRIGGER TAX OBLIGATIONS

Introduction To This Section Introduction To This Section

 Legal

• Withholding (by employer for employee)
• Nexus (for the employer and the employee)

 Practical

• Filing obligations (for the employer and employee)
• Penalty issues (for the employer and employee)
• Need for a reliable tracking system

g y  Theoretical goals

• Nexus and withholding thresholds should be clear and uniform.
• Nexus thresholds should not be based on de minimis in-state

visits or modest telecommuting by employees.

• The same employee-based nexus thresholds should apply to

employers and employees.

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Nexus And Telecommuting Nexus And Telecommuting

 Under basic nexus rules, telecommuting employees can create nexus for their employers. p y  Under basis nexus rules, telecommuting employees can create nexus for themselves and be subject to personal income tax filing nexus for themselves and be subject to personal income tax filing requirements and liability.

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Employee Withholding: Nexus Basics Nexus Basics

 Nexus basics - Individuals  Nexus basics - Individuals

• A state has nexus over a resident and can subject all of a

resident’s income to tax, regardless of where the income is earned earned.

• A state has nexus over a non-resident to the extent that such

individual derives income from in-state activities.

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Employee Withholding: Employer Nexus Employer Nexus

 Employer nexus

• Employer statutory nexus is generally statutorily triggered by

“doing business” or “transacting business” in-state, maintaining an

• ffice, owning or leasing property, or having employees

performing services for the employer in-state.

• The U.S. Constitution may limit the breadth of statutory nexus.
• The Commerce Clause of the U.S. Constitution may require

y q that an in-state physical presence exist, although the applicability of the rule to corporate income tax has not been resolved.  Quill Corp. v. North Dakota, 504 U.S. 298 (1992)  KFC Corp. v. Iowa Dep’t of Revenue, 792 N.W.2d 308 (Iowa 2010), petition for cert. filed (U.S. Apr. 28, 2011) (No.

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( ), p ( p , ) ( 10-1340)

Employee Withholding: Employer Nexus (Cont ) Employer Nexus (Cont.)

 Employer nexus

• Under basic nexus rules telecommuting employees can create
• Under basic nexus rules, telecommuting employees can create

nexus for their employers.

• Employers will have an in-state physical presence (the

employee at a minimum and perhaps also property and an employee, at a minimum, and perhaps also property and an

• ffice).

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Employee Withholding: N T i Nexus Triggers

 Examples

• Hiring an employee to perform back office or software support

services from his or her home, in a state other than that in which , the employer has offices

• Sending an employee into a state to meet with clients
• Allowing senior personnel to work from their homes and providing

Allowing senior personnel to work from their homes and providing them with or reimbursing them for expenses related to work

• Allowing a long-term employee who needs to relocate for

personal reasons to telecommute personal reasons to telecommute

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Employee Withholding: Telecommuting Issues And Challenges Telecommuting Issues And Challenges

 Employers may not be aware that there are tax ramifications from  Employers may not be aware that there are tax ramifications from telecommuting and may not have tracking systems in place.  Even if an employer adopts a tracking system employees may not  Even if an employer adopts a tracking system, employees may not report telecommuting completely or accurately.

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Practical Impacts Of Withholding On Corporate Exposure g p p

 Tax costs of telecommuters to employers can be substantial and may include, in addition to “employer” taxes (withholding, unemployment insurance, workers’ compensation), corporate income and franchise taxes; and may impose on employers a sales tax collection responsibility.  Implementation of tracking system may be costly.  Employees may not comply with the tracking system to avoid Employees may not comply with the tracking system, to avoid potential personal income tax obligations.

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Corporate Withholding Issues Corporate Withholding Issues

 Withholding thresholds vary from state to state.

• Visit thresholds
• E.g., Connecticut and New York (14 days)
• Day count methodology may vary
• Income thresholds
• Fixed dollar

 Idaho ($1,000)

• Tied to personal exemption

 New Jersey, West Virginia  Withholding for employees can lead to taxability inquiries.

• Some statutes explicitly provide that withholding standing alone is not a

nexus-generating event.

• Withholding “does not in itself” create nexus for the withholding

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• agent. N.C. Gen. Stat. § 105-163.4

Corporate Withholding Provisions g

 Sample withholding provisions

• Georgia: Georgia defines an employer as “any person for whom

an individual who is a resident or domiciliary of this state performs

• r performed any service of whatever nature ... ” Ga. Code Ann.

§ 48 7 100(5) § 48-7-100(5)

• New Jersey: Every “employer maintaining an office or transacting

business within this State and making payment of any wages subject to New Jersey personal income tax or making payment of subject to New Jersey personal income tax or making payment of any remuneration for employment subject to contribution under the New Jersey ‘unemployment compensation law’ ... to a resident or nonresident individual shall deduct and withhold from such wages ” N J St t A § 54A 7 1( ) ... ” N.J. Stat. Ann. § 54A:7-1(a)

• North Carolina: North Carolina requires an employer to withhold

income tax from wages of all residents regardless of where earned N C Gen Stat § 105-163 1(4)

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• earned. N.C. Gen. Stat. § 105 163.1(4)

Corporate Income And F hi T E Franchise Tax Exposure

 Employers may be viewed as “doing business” or “transacting business” in the state of the telecommuter.  P.L. 86-272 prohibits the imposition of a net income tax by a state if the only activities performed in the state relate to solicitation of sales

• f tangible personal property.
• Wisconsin Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S.

214, 231 (1992) (although case recognized that de minimis non- solicitation activities will not cause the loss of P.L. 86-272 protection, the replacement of gum by sales representatives was deemed sufficient to cause the company to lose the protection)

• Does not protect companies that solicit sales of intangible

property, e.g., software

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Corporate Income And F hi T E (C t ) Franchise Tax Exposure (Cont.)

 Many states impose taxes that are not “income” taxes, and thus companies are not protected under P.L. 86-272. For example:

• Ohio commercial activity tax, Washington business and

O y , g

• ccupation tax
• Lamtec Corp. v. Dep’t of Revenue, 246 P.3d 788 (Wash.),

petition for cert. filed (U.S. Apr. 19, 2011) (No. 10-1289) (during p ( p , ) ( ) ( g eight-year period, employees in the state for some part of 50 to 70 days were sufficient for nexus)  Even if employers have protection for net income tax under P.L. 86- 272, that protection will not eliminate the employers’ responsibility to withhold income tax, pay unemployment and disability insurance, d k ’ ti

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and workers’ compensation.

Sample Of State Positions, And Developments On Telecommuting Creating Corporate I T N Income Tax Nexus

 New Jersey: Software developer that “regularly and consistently permits” an employee to work from her home in New Jersey is doing business in the state and is subject to New Jersey’s corporation business tax.

• Telebright Corp. v. Director, Div. of Taxation, 25 N.J. Tax 333

(N.J. Tax Ct. Mar. 24, 2010)

• Common elements of telecommuting (use of company-owned

property, no other in-state company connection)

• Contact was not “sporadic, occasional or intermittent.”

p ,

• The physical presence of employee was sufficient “substantial

nexus.”

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Sample Of State Positions, And Developments On Telecommuting Creating Corporate I T N (C t ) Income Tax Nexus (Cont.)

 Illinois: State’s position is that having even one employee in the state working from his or her home, if the activities are not protected under P.L. 86-272, is sufficient for tax nexus and requires registration for withholding purposes and the filing of corporate income and replacement tax returns.

• General Information Letter (GIL) No IT 09 0004 (Ill Dep’t of Revenue
• General Information Letter (GIL) No. IT 09-0004 (Ill. Dep t of Revenue
• Feb. 9, 2009) (suggested that a single employee who telecommutes from

Illinois, out of the corporation’s 400 employees, was sufficient to create

• nexus. The GIL recognized that because the corporation made no sales

to Illinois customers, no income would be allocated to the state. Company would be required to withhold income tax under 35 Ill. Comp. Stat. § 5/701.)

• Private Letter Ruling No IT 93 0042 (Ill Dep’t of Revenue Apr 7 1993)
• Private Letter Ruling No. IT 93-0042 (Ill. Dep t of Revenue Apr. 7, 1993)

(employee working from her home, and using company-provided computer and leased phone line, exceeded mere solicitation and was sufficient to constitute nexus)

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Sample Of State Positions, And Developments On Telecommuting Creating Corporate I T N (C t ) Income Tax Nexus (Cont.)

 Virginia: Business, professional and occupational license (BPOL) tax is not imposed unless there is an in-state “definite place of p p business”; an employee working from a home office is not a definite place of business for the employer, unless the employer holds itself

• ut as a business at that location. Va. Public Doc. Ruling No. 10-154

(July 28, 2010)

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Sample Of State Positions, And Developments On Telecommuting Creating Corporate I T N (C t ) Income Tax Nexus (Cont.)

 What is the implication, for the employer’s nexus, of a rule that attributes an l ’ i t t t th l ’ h t t ? employee’s in-state presence to the employer’s home state?

• New York: Has a “convenience of employer” rule, which deems days worked
• utside New York for the convenience of the employee to be days worked in New

York.

• Huckaby v. New York State Div. of Tax App., 829 N.E.2d 276 (N.Y.), cert.

denied, 546 U.S. 976 (2005) (An individual working for a New York-based employer from his home in Tennessee had his entire income sourced to New York, even though he spent only 25% of his time in New York.) , g p y )

• Zelinsky v. Tax App. Trib., 801 N.E.2d 840 (N.Y. 2003), cert. denied, 541 U.S.

1009 (2004) (An NYU law professor who worked from his home in Connecticut and taught in New York City a few days a week was held not to be working from home for the convenience of the employer Taxing him on 100% of his from home for the convenience of the employer. Taxing him on 100% of his NYU salary did not violate the Commerce Clause.)

• In re Kumar, DTA No. 822747 (N.Y.S. Div. of Tax App., Admin. Law Div. May

6, 2010) (An individual who never came to the employer’s New York office was not liable for New York personal income tax )

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not liable for New York personal income tax.)

Other Corporate Tax Implications Of Telecommuting Implications Of Telecommuting

 Apportionment

• General rule
• Only wages for employees reported on unemployment tax reports

are includible in the payroll factor.

• Amounts reported on Form 1099 are not wages.
• If the wages are paid to telecommuting employees, to which state(s)

should the wages be apportioned?

• St t

id h th th i id d i t t i

• States may consider whether the service provided in-state is

connected to an in-state or out-of-state “base of operations.”

• States may consider whether the employee is a state resident.
• If the general payroll apportionment provision does not properly reflect
• If the general payroll apportionment provision does not properly reflect

employees’ in-state activities, then a request for discretionary adjustment to the factor should be considered

• Note: More states are shifting to single-sales factors.

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Note: More states are shifting to single sales factors.

Other Corporate Tax Of (C ) Implications Of Telecommuting (Cont.)

• Sample state payroll provision (Massachusetts)
• “Compensation is paid in this commonwealth if:
• 1. The employee’s service is performed entirely within this

commonwealth, or

• 2. The employee’s service is performed both within and without this

commonwealth, but the service performed without this commonwealth is incidental to the employee’s service within this commonwealth; or commonwealth; or

• 3. Some of the service is performed in this commonwealth, and
• i. The base of operations or, if there is no base of operations,

the place from which the service is directed or controlled is in p this commonwealth; or

• ii. The base of operations or the place from which the service is

directed or controlled is not in any state in which some part of

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the service is performed, but the employee’s residence is in this commonwealth.” Mass. G.L. ch. 63, § 38(e)

Federal Legislation Federal Legislation

 Mobile Workforce State Income Tax Simplification Act of 2011, H.R. 1864, 112th Cong. (introduced May 12, 2011)

• Would address the taxation of non-resident employees (with the

exclusion of professional athletes, professional entertainers, and certain public figures)

• Would set a 30-day threshold below which a state could not

subject the non-resident to state income tax or require employers to withhold tax

• Previous attempts to enact such legislation have failed. H.R. 6167

(2005), 109th Cong. (2006); H.R. 3359, 110th Cong. (2007); H.R. 2110, 111th Cong. (2009)

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MTC’s Position

 Mobile Workforce Withholding and Individual Income Tax model statute

• Sets a 20-day threshold of days, below which a state could not subject

y y , j the non-resident to state income tax, and employers would not be required to withhold taxes

• Requires an aggregated day count for employees working for

affiliated employers

• Travel through a state is not considered in the day count.
• If an employee is in multiple states on the same day, presence will

count toward threshold for each state.

• Does not set a de minimis income threshold
• es
• t set a de

s co e t es o d

• Requires reciprocity by the home state of the non-resident
• Provides exceptions for professional athletes, professional entertainers,

“persons of prominence,” construction workers, and persons who are “key employees” under IRC § 416(i) employees under IRC § 416(i)

• Provides for an employer “safe harbor” for failure to withhold penalties

due to a miscalculation of days where the employer has relied on: (1) a time and attendance system; (2) if such system does not exist, employee travel records; or (3) if the system or travel records do not exist, employee

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( ) y p y travel expense reimbursement requests.

• Does not address local withholding or local income tax imposition

State Mobile Workforce Legislation State Mobile Workforce Legislation

 North Dakota

• Effective beginning 2013 (L 2011 § 2) S B 2170 62nd Leg
• Effective beginning 2013 (L. 2011, § 2) S.B. 2170, 62

Leg.

• Assemb. (N.D. 2011)
• Closely mirrors the MTC model law
• Only applies if state of residence adopts a similar statute
• Only applies if state of residence adopts a similar statute

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DIFFICULTIES WITH CURRENT

Chaim Kofinas, WithumSmith+Brown

DIFFICULTIES WITH CURRENT STATE LAWS, REGULATIONS

NE XUS: WHAT IS IT ?

• Ne xus is c o nta c t with a sta te tha t is suffic ie nt to e sta b lish a

c o nne c tio n a llo wing the sta te to impo se a ta x.

• Pro te c tio n fro m sta te s o ve rre a c hing to c la im ne xus c o me s fro m

two so urc e s:

• T

he US Co nstitutio n: T he Due Pro c e ss Cla use a nd the T he US Co nstitutio n: T he Due Pro c e ss Cla use a nd the Co mme rc e Cla use , a nd the ir me a ning s a s inte rpre te d in the fe de ra l a nd sta te c o urts

• F

e de ra l L a w: Pub lic L a w 86-272 F e de ra l L a w: Pub lic L a w 86 272

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NE XUS, OR “DOING BUSINE SS” ST ANDARDS VARIE S BY ST AT E ST ANDARDS, VARIE S BY ST AT E

• I

n so me sta te s, the me re pre se nc e o f a te le c o mmuting e mplo ye e g ive s a n e mplo ye r b usine ss ta x ne xus.

• NJ Admin Co de 18:7-1.9 a lso sa ys, “the e mplo yme nt in Ne w Je rse y
• f a g e nts, o ffic e rs a nd e mplo ye e s” c re a te s ne xus. So unds ve ry

inc lusive

• NC Co de 5C0102, o n the o the r ha nd, sa ys, “re nde ring o f a se rvic e

to c lie nts o r c usto me rs in No rth Ca ro lina b y a g e nts o r e mplo ye e s” to c lie nts o r c usto me rs in No rth Ca ro lina b y a g e nts o r e mplo ye e s se e ms to limit ne xus c re a ting a c tivity to b usine sse s a c tua lly se rvic ing

• r se lling to NC re side nts.

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BNA APRIL 22, 2011 ST AT E T AX DE PT SURVE Y ST AT E T AX DE PT . SURVE Y

• 37 jurisdic tio ns indic a te d tha t the y c o nside r tha t the a c tivitie s o f

te le c o mmute rs c re a te e mplo ye r ne xus (fo r a ll b usine ss ta xe s).

• K

Y, MD, MS, OK a nd VA sa id the te le c o mmute rs wo uld no t c re a te e mplo ye r ne xus.

• 2011 surve y a ske d if a nswe r wo uld c ha ng e if no sa le s we re ma de

into the sta te . T he re se e me d to b e no diffe re nc e . T his q ue stio n, pro mpte d b y a WS+B ta x ma na g e r indic a te s tha t sta te s g e ne ra lly pro mpte d b y a WS+B ta x ma na g e r, indic a te s tha t sta te s g e ne ra lly vie w the pre se nc e o f a te le c o mmuting e mplo ye e in the ir sta te a s c re a ting b usine ss ta x ne xus.

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GE NE RAL WIT HHOL DING RE QUIRE ME NT RE QUIRE ME NT

• Sta te s typic a lly re q uire withho lding o n wa g e s pa id to e mplo ye e s

pe rfo rming se rvic e s within the ir b o rde rs.

• T

e le c o mmute rs c re a te withho lding ta x ne xus fo r e mplo ye rs.

• T

wo type s o f te le c o mmute rs

• T

wo type s o f te le c o mmute rs

• I

tine ra nt

• Re g ula r (T

e le b rig ht c a se )

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SAMPL E S OF T YPICAL ST AT E WIT HHOL DING RE QUIRE ME NT S WIT HHOL DING RE QUIRE ME NT S

• AL

: An e mplo ye r who is a re side nt o f Ala b a ma must withho ld ta x fro m the wa g e s o f e mplo ye e s who a re no t Ala b a ma re side nts, o nly to the e xte nt tha t the wa g e s a re e a rne d in Ala b a ma .

• AZ: An e mplo ye r who is a re side nt o f AZ must withho ld ta x fro m the

wa g e s o f e mplo ye e s who a re no t AZ re side nts, o nly to the e xte nt g p y , y tha t no n-re side nt wa s pre se nt in AZ fo r 60 o r mo re da ys in a ye a r.

• CA: E

ve ry e mplo ye r pa ying wa g e s to re side nt e mplo ye e s fo r CA: E ve ry e mplo ye r pa ying wa g e s to re side nt e mplo ye e s fo r se rvic e s in- o r o ut-o f-sta te , a nd no n-re side nt e mplo ye e s fo r se rvic e s in-sta te , must withho ld pe rso na l inc o me ta x fro m suc h wa g e s.

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NJ T E L E COMMUT E R WIT HHOL DING RE QUIRE ME NT WIT HHOL DING RE QUIRE ME NT

• NJ: F
• r no n-re side nt te le c o mmute rs who ne ve r e nte r the

c o mpa ny’ s ho me sta te to pe rfo rm wo rk o r se rvic e s Ne w Je rse y use s c o mpa ny s ho me sta te to pe rfo rm wo rk o r se rvic e s, Ne w Je rse y use s a “physic a l pre se nc e ” te st. Using this te st, o nly the te le c o mmuting e mplo ye e ’ s ho me sta te will ta x the inc o me .

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NY T E L E COMMUT E R RUL E NYS T SB M 06(5)I NYS: T SB- M- 06(5)I

• NY ta xe s a ll wa g e s e a rne d fro m a n e mplo ye r in o ne o f tho se

sta te s, unle ss a no n-re side nt’ s wo rk must b e pe rfo rme d fro m his o r he r o ut-o f-sta te ho me o r lo c a tio n b y ne c e ssity. T his is c a lle d the “c o nve nie nc e rule .”

• T

SB-M-06(5)I : No n-re side nt te le c o mmute r is no t e a rning NY ta xa b le inc o me whe n te le c o mmuting , if the ho me o ffic e is a “b o na fide e mplo ye r o ffic e ” AND the te le c o mmuting is a re sult o f e mplo ye r ne c e ssity, no t e mplo ye r o r e mplo ye e c o nve nie nc e . NY withho lding is a llo c a te d a s a re sult.

• No te : NY is kno wn to re q uire tha t the e mplo ye r pro ve the

te le c o mmuting is o ut o f ne c e ssity.

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IL L INOIS T AXAT ION OF T HE T E L E COMMUT E R T E L E COMMUT E R

• I

n Ge ne ra l I nfo rma tio n L e tte r I T 09-0004-GI L , the I L DOR de te rmine d tha t no t o nly did a te le c o mmute r pe rfo rming a c c o unts re c e iva b le dutie s vio la te the re q uire me nts fo r 86-272 pro te c tio n a nd c re a te ne xus fo r a se lle r o f T PP, b ut a lso he r pre se nc e a lso re q uire d the c o mpa ny to “withho ld I llino is inc o me ta x o n the e ntire a mo unt o f he r c o mpe nsa tio n.”

• I

I T A Se c t. 701 wa s c ite d a s suppo rt fo r the de te rmina tio n. T ha t se c tio n o f the c o de re q uire s withho lding o n c o mpe nsa tio n pa id “to a re side nt b y a pa yo r ma inta ining a n o ffic e o r tra nsa c ting b usine ss within this Sta te .”

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MASSACHUSE T T S

• Ma ss. T

a x L a w Co de 830 CMR 62.5A.1 sa ys tha t a te le c o mmute r will

• nly b e sub je c t to ta x o n the inc o me e a rne d while in MA. T

he c o de y j g ive s the fo llo wing e xa mple : “A te le c o mmute r wo rks fo r a Ma ssa c huse tts firm, ma inly o ut o f he r ho me in Ohio . T he te le c o mmute r wo rks a to ta l o f 240 da ys during the ta x ye a r, a nd is in Ma ssa c huse tts o n 60 o f tho se da ys. He r sa la ry is $120,000 pe r ye a r. He r Ma ssa c huse tts so urc e inc o me is $30,000.”

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MAXINE AL L E N AND T HE NY COMMISSIONE R OF L ABOR COMMISSIONE R OF L ABOR

• T

e le c o mmuting ha s ha d a dve rse impa c ts o n the wo rke r.

• I

n the 90s, Ma xine Alle n wa s a fulltime te le c o mmute r fro m F L fo r he r NY e mplo ye r. p y

• I

n 1999 she wa s le t g o a nd she a pplie d fo r une mplo yme nt in F L , b ut wa s turne d do wn wa s turne d do wn.

• She sub se q ue ntly a pplie d in NY a nd wa s a lso re je c te d.
• Ac c o rding to NY’ s L

a b o r L a w a t the time , une mplo yme nt insura nc e o nly c o ve re d “lo c a lize d” wo rk.

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39

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• Ca se wa s de c ide d in 2003.

OHIO

• Ho we ve r, the Ohio DOT

ha s c o nc lude d tha t e mplo ye e s who te le c o mmute fro m within its b o rde rs a s a re sult o f a ha rdship, suc h a s a g ing pa re nts o r a c hild with spe c ia l ne e ds do no t c re a te ne xus fo r a g ing pa re nts o r a c hild with spe c ia l ne e ds, do no t c re a te ne xus fo r the ir e mplo ye rs.

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ORE GON

• I

n 2007, OR issue d a b ulle tin title d, “Withho lding / T ra nsit T a x I nfo rma tio n: Out-o f-sta te / No nre side nt E mplo ye rs.” / p y

• T

he pub lic a tio n c ite d Ore g o n la w b y sta ting tha t e mplo ye rs must withho ld inc o me ta x fro m e mplo ye e s wo rking in Ore g o n withho ld inc o me ta x fro m e mplo ye e s wo rking in Ore g o n.

• T

he no tic e fo c use d o n te le c o mmute rs.

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WISCONSIN

• An no n-re side nt e mplo ye e who te le c o mmute s fo r a Wisc o nsin

An no n re side nt e mplo ye e who te le c o mmute s fo r a Wisc o nsin e mplo ye r is sub je c t to WI inc o me ta x o n a mo unts e a rne d fo r da ys pre se nt in WI . WI e mplo ye r must withho ld fro m the te le c o mmute r if the to ta l o f WI inc o me is mo re tha n $1,500 pe r ye a r. $ , p y

• Also , Wisc o nsin will no t ta x the wa g e s o f re side nts o f I

L , I N, K Y o r MI , due to re c ipro c a l a g re e me nts with tho se sta te s due to re c ipro c a l a g re e me nts with tho se sta te s.

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HOW DOE S A ST AT E CAT CH A T E L E COMMUT E R’S E MPL OYE R WIT H BUSINE SS T AX NE XUS?

• Sta te s ha ve a va rie ty o f wa ys to disc o ve r no n-file rs.
• Ne xus surve ys: E

mplo ye e s (te le c o mmute rs)/ a g e nts in sta te ? ”

• Cro ss-ma tc hing ta x type s, e .g . (te le c o mmute r) pa yro ll ta x, c o rpo ra te

inc o me ta x Y h t b k t th fi t d h d (fi t i t t

• Yo u ma y ha ve to g o b a c k to the first d a y yo u ha d ne xus (first in-sta te

te le c o mmute r) a nd file re turns tha t will inc lude inte re st a nd pe na ltie s.

• So me sta te s o nly g o b a c k e ig ht o r nine ye a rs o n ne xus disc o ve rie s
• So me sta te s o nly g o b a c k e ig ht o r nine ye a rs o n ne xus disc o ve rie s.
• Be st mitig a tio n me a sure s a va ila b le : Vo lunta ry disc lo sure a g re e me nts

(VDAs) a nd a mne stie s

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(VDAs) a nd a mne stie s

RE CIPROCAL AGRE E ME NT S

• AZ, CA, I

N, OR a nd VA

• DC MD a nd VA

DC, MD a nd VA

• MI

, I L , I N, K Y, MN, OH a nd WI

• NJ a nd PA
• PA, I

N, MD, NJ, OH, VA, a nd WV

• VA DC K

Y MD PA a nd WV

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VA, DC, K Y, MD, PA a nd WV

T HRE SHOL DS

• Do lla r o ne : Mo st sta te s
• Da ys c o unt: AZ a nd NY

Da ys c o unt: AZ a nd NY

• Do lla r c o unt: VA a nd WI
• Othe r: GA a nd HI
• No -ta x sta te s: Ala ska , DC (no n-re side nts o nly), F

lo rida , Ne va da , So uth Da ko ta , T e xa s a nd Wyo ming

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INCOME SUBJE CT T O WIT HHOL DING WIT HHOL DING

• Sa la rie s/ wa g e s
• Da ys c o unt/ ho urly c o unt
• Bo nus

Bo nus

• Prio r-ye a r se rvic e pe rfo rma nc e
• De fe rre d c o mpe nsa tio n

St t h d f d

• Sta te whe re de fe rre d
• Sta te a t time o f pa yme nt
• Optio ns
• Gra nt to ve st
• Gra nt to e xe rc ise

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E MPL OYE R’S RE CORDKE E PING RE CORDKE E PING

• E

mplo ye e lia b ility o n whic h a n e mplo ye r must a c t

• Re g istra tio n fo r withho lding c re a te s a tra il fo r inc o me ta x a nd sa le s

ta x ne xus.

• E

mplo ye e a c tivity-tra c king

• E

xpe nse re po rts

• Ce ll pho ne re c o rds

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ADMINISTRATIVE

Mindy Harada, PricewaterhouseCoopers

CHALLENGES FOR TAXPAYERS

Administrative Challenges And Options

Trends in audit

• States actively auditing employer withholding

y g p y g ― New York

• States actively auditing employee personal income tax

― California

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Administrative Challenges And Options (Cont.)

Trends in audit (Cont.)

• What will the auditor look at?
• What will the auditor look at?

― Is withholding performed in the correct state? ― Review of accounts payable documents p y ― Travel records ― Review of accounts receivable ― Tracks contracts, and hence employees

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Administrative Challenges And Options (Cont.)

Trends in audit (Cont.)

• Are the withholding rates correct?

Some states are actually looking at calculations to ― Some states are actually looking at calculations to determine if they are correct. ― New York and California ― Should supplemental rates have been used? ― Do you have state-equivalent to a W-4?

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Administrative Challenges And Options (Cont.)

Trends in audit (Cont.)

• Local taxes
• Local taxes

― Localities are now looking for revenue. ― Activity on San Francisco business tax, Ohio, y , , Pennsylvania, New York ― City of Wilmington, Dela. imposes steep penalties d i t t and interest. ― Employee- or employer-based tax

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Administrative Challenges And Options (Cont.)

Trends in audit (Cont ) Trends in audit (Cont.)

• IRS national research project

― Focus on executive compensation, employee fringe p , p y g benefits and worker classification ― 2,000-plus employers each year over three years

• State unemployment audits

― How are state unemployment audits initiated? I f ti h i ith IRS ― Information sharing with IRS ― Independent contractor tries to collect benefits Employee misclassification ― Employee misclassification ― Is state unemployment in the correct state?

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Administrative Challenges And Options (Cont.)

• HR, stock plan, relevant payroll systems
• Deferred compensation
• Stock options
• Stock options
• Bonus plans
• Relocation

Relocation

• Labor law

― Whose rules are you subject to? y j ― Overtime, hourly rate calculations

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Administrative Challenges And Options (Cont.)

• Challenges with employee movement
• Do you know where your workers are?
• Do you know where your workers are?
• Do you have a mechanism to capture time in each

location?

• Do you have the ability to compute and submit

withholding in local jurisdiction?

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Administrative Challenges And Options (Cont.)

• Challenges with employee movement (Cont.)
• How tax specialists can help
• How tax specialists can help

― Employee-tracking systems ― Nexus studies ― State rules on resident/non-resident taxation ― Review of “what’s possible vs. what’s not”

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Holly Hyans, Morrison & Foerster Chaim Kofinas, WithumSmith+Brown

OPTIONS TO CONSIDER IN

Chaim Kofinas, WithumSmith+Brown Mindy Harada, PricewaterhouseCoopers

ADDRESSING THESE TAX ISSUES ISSUES

Possible Solutions Possible Solutions

 Federal legislation B t h t hi if bl l t dd i i i f

• Best hope to achieve uniform, reasonable rules to address issues arising from

worker travel and telecommuting

• Hearings held on May 25, 2011 before the U.S. House of Representatives

Committee on the Judiciary Subcommittee on Commercial and Administrative Law

• COST

d th AICPA t th bill

• COST and the AICPA support the bill.

 COST noted the de minimis (.01%) cost to states.  AICPA recommended that withholding should only cover work performed after the 30-day threshold is met, in order to avoid a withholding cliff.

• Federation of Tax Administrators (FTA) opposes bill as “an unwarranted

intrusion into legitimate state tax authority and sovereignty.”  Claims the bill “invites tax avoidance”  Objects to language that would allow the employer to rely on the employee’s own determination of time in-state, unless the employer has actual knowledge of fraud  Objects to 30-day threshold  Advocates for a dollar threshold in addition to a day threshold

This is MoFo.

58

 Objects to the definition of “day,” which the bill requires be based on where a “preponderance” of the employee’s duties are performed.

Possible Solutions (Cont ) Possible Solutions (Cont.)

 Withholding

• Communicate potential reporting and withholding issues to

employees, with particular focus on highly-compensated senior employees

• Adopt system for tracking employee travel and days spent

working remotely

• Review requirements and thresholds in all applicable states

q pp  Nexus

• If employee travel may have created past nexus issues, employer

and/or employee may want to consider voluntarily disclosing past and/or employee may want to consider voluntarily disclosing past liabilities.

• Most states have voluntary disclosure programs, which limit

the lookback period and may eliminate or reduce interest and

This is MoFo.

59

the lookback period and may eliminate or reduce interest and potential penalties.

POSSIBL E SOL UT IONS (CONT .) ( )

• Re c og nize the issue
• Re vie w your a va ila ble doc ume nta tion syste ms

Re vie w your a va ila ble doc ume nta tion syste ms

• De ve lop a pla n of a tta c k
• Work the pla n
• Re pe a t ite ms 2- 4 a t re g ula r inte rva ls

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P ibl S l i (C ) Possible Solutions (Cont.)

• Perform internal audit of accounts payable function to see

where your skeletons exist

• Review vendor list and focus on employees paid through

ev ew ve do l st a d ocus o e ployees pa d t

• ug

AP

• Make sure you include outside travel firm, if used
• Track travel through expense reimbursements and identify

exposure

• Perform exposure analysis
• Perform exposure analysis
• Determine possible level of compliance

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Q&A Q&A

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CPE/CLE CODE: TTVCCE